Floating in troubled waters
The political uncertainty over the past couple of weeks coupled with the compromised decision making of a beleaguered government has exposed Pakistan’s economic fragility despite tall claims of the government to have secured strong fundamentals.
The rupee value and shares market went down like ninepins in a matter of days. The Eurobond yield maturing in 2024 went beyond 18 per cent — a record as the International Monetary Fund programme (IMF) was virtually stalled and exporters tried to hold back receipts as long as possible. The resultant increase in debt levels that now stand at about Rs43 trillion and debt servicing costs will show up in the upcoming budget 2022-23.
The widening fiscal gap jacked up interest rates on local government papers above the 13pc psychological barrier understandably when perhaps for the first time the government of Pakistan is doling out a significant amount of public money to large populations to run their cars and buses at cheaper petrol and diesel rates. The petroleum consumption has increased by 23pc.
The market and public sentiments worsened and the central bank’s reserves fell below the $12 billion mark — just above the level in the 2018 crisis or less than two months of import cover — as the increasing trade gap took a toll on reserves amid widening current account deficit and higher debt payments. The fall in reserves has been rather higher than before, an $8bn fall since August 2021 when it stood well over $20bn.
The trade deficit in nine months widened well above $35bn, again a record. It is much higher than the full-year budget target of $28bn. The full-year trade deficit of $37bn in 2018 was described by the PTI government as the mother of all ills for which it adopted measures that brought the economy to its knees — a net negative GDP growth rate for three straight years.
The governor State Bank of Pakistan’s (SBP) advice only a couple of months ago that the current account deficit should be mentioned with pride as it did not affect foreign exchange reserves was as short-lived as a water drop that rolls down a leaf. Market interventions to the extent of $4bn did little help to block the rupee slide.
Last ditch efforts to secure over $21bn financing from China including some load rollovers yielded only $2.2bn although targeted leaks were made about rollovers of more than $4.2bn in the last days of March. Notwithstanding friendship ‘deeper than the sea, higher than the Himalayas and sweeter than honey’, Beijing like any other financier is also perhaps waiting for the new set-up to bank on. Another $2bn rollover from UAE did not help much either.
But even these challenging times exhibited the strength of decision making, time will tell how long lasting. The Supreme Court of Pakistan’s decision to restore the parliament brought back a sense of political clarity. Coupled with the SBP’s decision to hold an emergency monetary policy meeting to raise the policy rate to 12.25pc, the stock market recovered over 600 points and the rupee gained almost 2pc value against the dollar the very next day.
The utilisation of development funds in the first nine months of the fiscal year has been limited to a miserly Rs405bn against a budget allocation of Rs900bn that would now have to be drastically slashed. Even this utilisation is mainly because of maximum use for foreign funds for development schemes — at Rs80bn against annual foreign exchange component of Rs100bn — otherwise, the utilisation was struggling at just Rs325bn in nine months. Interestingly, the government has overspent funds on the development schemes of parliamentarians.
On the other hand, the government committed Rs31bn out of budget in April to subsidise petroleum products for all without any differentiation between the land cruisers of the rich and motorbikes of the poor. For April, the out-of-budget subsidy is estimated well above Rs43bn. To be precise, the government is paying about Rs25 and Rs42 per litre on petrol and diesel respectively at present out of budget. Simply put, the government is selling petrol and diesel at about Rs150 and Rs145 per litre respectively against its own ex-depot landing cost of Rs175 and Rs187 per litre.
This is on top of the waiver on taxes of about Rs30 per litre petroleum levy and about Rs25 per litre sales tax assumed at standard 17pc. Reversing this price trend would perhaps be the biggest challenge for the upcoming government and of course unthinkable at this stage. After all, which political government could afford to increase petrol and diesel prices by Rs80-95 per litre and more so when it has to return to the people in less than a year for the next elections.
But this is the cost that has crept into the system that the nation would have to bear in one way or the other. According to former Prime Minister Shahid Khaqan Abbasi, the government had caused over Rs600bn loss to the budget in the last two months. He also includes the cost of electricity price cut in his calculations.
The challenge with the current uncertain situation is that decision making in the cabinet and its committees have come to a standstill. The principal accounts officers (PAOs), namely bureaucrats, have no powers to take major policy decisions except to authorise or stop funds already approved by the parliament and placed at their disposal. But in such times, they become overcautious and tend not to displease the incoming government.
In a precarious position are cash flows and financials of the power companies where circular debt is almost close to Rs3 trillion and many power plants are heading towards fuel constraints. Just imagine the country’s biggest fuel supplier — PSO — has over Rs500bn worth of receivables and is floating just because it is owned by the government. This happens at a time when the summer has just begun rather a little earlier and forecasts about water availability are depressing. How the consumers come across this peak harsh season is yet to be seen.
The ongoing transition entails a lot more uncertainty than meets the eye. It is not yet clear how long the budding political coalition would stay together and if all partners would be ready to share the blame for impending tough decisions, taken earlier the better. The delay would only spread cancer to an already fragile body — the Pakistan economy.
Published in Dawn, The Business and Finance Weekly, April 11th, 2022